Fed Jawboning, Minutes Give Stocks A Lift

On April 8, we outlined reasons to be concerned about stocks. The Fed pays close attention to the market’s risk profile; maybe they didn’t like what they saw. In addition to the Fed minutes that were released Wednesday, Charles Evans seemed to be carrying the “talk stocks back up” torch for the U.S. central bank. From Marketwatch:

Many people who argue that inflation is just around the corner have been repeating the same warning for the past five years, said Charles Evans, the president of the Chicago Federal Reserve Bank, on Wednesday. “I confess that I am somewhat exasperated by these repeated warnings given our current environment of very low inflation,” Evan said in a speech at an economic policy conference in Washington D.C. Evans said he still sees the economic environment pointing to below-target inflation “for several years.” Evans debunked current arguments that inflation is just over the horizon. He said that there is “substantial room” for stronger wage growth without inflation pressures building and added the Fed’s large balance sheet is not a “classic warning sign” of inflation. Commodity prices also seem to be an unlikely propellent of inflation at the moment, he said.

Evans began making dovish comments Tuesday in an effort to calm tapering fears. From Reuters:

There is a real risk that the Federal Reserve could close the tap for monetary stimulus too quickly, a top official at the U.S. central bank said on Tuesday.”One of the big risks is that we withdraw our accommodative policies prematurely,” Charles Evans, president of the Federal Reserve Bank of Chicago, told a panel at the International Monetary Fund.

The minutes from the March Federal Reserve meeting were released Wednesday, providing another source of good news for those concerned about interest rates. From The Wall Street Journal:

The dollar weakened against other currencies Wednesday after details from the Federal Reserve’s most recent meeting showed no signs of higher interest rates ahead. The minutes from the Federal Open Market Committee’s March meeting discussed keeping interest rates low as long as inflation remained below 2% and made no mention of an accelerated time frame for raising them, said Alan Ruskin, global head of G10 FX strategy at Deutsche Bank. DBK.XE +0.26% Lower interest rates have weighed on the dollar.

Investment Implications – Flexibility Takes Fed Into Account

Federal Reserve jawboning is one of many reasons to maintain maximum flexibility in the financial markets. Did Wednesday’s pop in stocks materially change the indecisive climate on Wall Street? According to the chart below, not yet.

How about that Dow Theory non-confirmation we have been concerned about; was it cleared up? The Dow has not posted a new closing high, which means the answer is “no”.

Wednesday’s sharp reaction to the Fed minutes and statements from Charles Evans did little to change the market’s risk-reward profile. Therefore, we made no changes to our current mix of stocks (SPY) and cash. The chart below, presented earlier this week, reminds us that periods of uncertainty can be resolved to the upside. Our cash will be redeployed when the market shows some conviction in some corner of the asset class world. We are just not there yet.